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U.S. Treasury Secretary Steven Mnuchin has agreed to address any potential “unintended
consequences” the new U.S. tax reform law might have on European Union companies,
including competitive disadvantages and revenue losses from new base erosion measures.

Following a Jan. 25 meeting with French Finance Minister Bruno Le Maire at the World
Economic Forum in Davos, Switzerland, a French diplomat told Bloomberg Tax that Mnuchin
agreed that “experts should discuss” EU complaints “in detail, with practical examples,
and then consider how to address them. This will now take place.”

The French diplomat said EU concerns that the tax law contains illegal export subsidies
and is discriminatory haven’t changed. “We will be attentive to results on the ground,
and the issues remain numerous and complex,” the diplomat said.

Bulgaria Poses Questions

The meeting with Mnuchin came as the 28 EU member nations continue to debate how to
respond to the U.S. over concerns that the new tax act (
Pub. L. No. 115-97) violates not only World Trade Organization rules but also bilateral double taxation
treaties and Organization for Economic Cooperation and Development base erosion and
profit shifting reforms.

Based on a confidential document obtained by Bloomberg Tax, EU presidency holder Bulgaria
called on EU member states to respond to the following four questions:

“How is the U.S. tax reform likely to impact on your national economy and double
taxation treaties, and which elements of the U.S. tax reform are of most concern?”;

Should a “common reaction,” such as a letter by Bulgaria on behalf of the 28 member
nations, “be envisaged at the level of the EU in reaction to these developments?”;

“How do you assess their impact on international tax reform, notably through the
OECD and G-20 strands, and to what extent should the EU in this respect speak with
one voice?”;
and

“Should the EU consider changing its tax policy strategy (notably in respect of EU
Value-Added Tax and corporate income taxation) in reaction to the U.S. tax reform
with a view to preserving its competitiveness?”

According to EU officials, tax experts from EU member nations addressed the Bulgarian
questions at a Jan. 17 meeting, and will take them up again Feb. 28.

“The discussions were general,”
an EU diplomat, who took part in the Jan. 17 meeting, told Bloomberg Tax on the condition
of anonymity. “There is a lot of concern not only on the substance of complaints.
There was also a consensus that the European Commission should pursue aspects of the
reform that include trade law violations, as it has the legal mandate to represent
all EU member states on trade issues at the WTO.”

The EU diplomat also said there is dissatisfaction among smaller EU member nations
that France, Germany, Italy, Spain, and the U.K. have pursued their complaints with
Mnuchin apart from the other 21 EU countries. The five EU countries
wrote a letter in December to Mnuchin outlining their concerns.

No VAT Change

Joachim Englisch, a tax law professor at the University of Muenster, told Bloomberg
Tax in a Jan. 26 email it would be a mistake for the EU to consider VAT law changes
to counter negative competitive aspects of the U.S. tax reform. However, he said the
EU should challenge the foreign-derived intangible income regime that imposes a 13.125
percent effective tax rate on excess returns earned directly by a U.S. company from
foreign sales, including licenses, leases or services.

“This is a clear export subsidy,”
Englisch said. He added that EU member nations also should adopt withholding taxes
on royalties paid to entities in non-EU member states when they are benefiting from
a preferential regime as a counter-measure.

“If that is not feasible, member states should be given more flexibility in deviating
from” Action 5 of the Organization for Economic Cooperation and Development’s Action
5 on patent boxes, Englisch said.

As for the EU speaking with one voice in challenging the U.S. at the OECD, Englisch
said a unified reaction would be preferable, but “it will be difficult given the diversity
of tax policy positions in the EU.”

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